Opening a new credit card can be a huge boost to your credit, but did you know it can also affect your existing FICO score?
If you’re not sure what a FICO score is, you’re not alone. Essentially, it’s a key component of your financial wellbeing. It was created by the created by Fair Isaac Corp. and is used by the vast majority of lenders to determine your financial risk.
It’s a three-figure number that should fall within the 300-850 score range. As a quick overview: Anything less than 579 is viewed as an “indication of a very risky borrower;” 580 to 669 is means “some lenders will approve” you; 670 to 739 is the average score among U.S. borrowers and is “considered good;” 740 to 799 is viewed as an “indication of a very dependable borrower;” and anything above 800 is an “indication of an exceptional borrower.”
Now that you know what a FICO score means, we can start talking about opening credit cards and what it does to your score.
It will lower your credit age
At least 15 percent of your FICO score is based on your credit age, or the amount of time you’ve been using and building credit. The longer you’ve had credit, the better your score is likely to be.
Your credit age is determined by the amount of time you’ve had your first credit card as well as the average amount of time you’ve been using any other accounts. Unfortunately, opening a new credit card could bring that average down. Consider those numbers before you open a new account.
“Only apply for new credit cards as needed, a hard inquiry by a credit card issuer will affect your credit for a year,” says Tony Rasmussen, VP of financial education at Mountain America Credit Union. “To help improve your credit score, keep current cards open, avoid opening new accounts, and focus on paying down balances, rather than transferring balances from card to card. “
It will help your credit utilization ratio
Opening a new credit card could help boost your credit score by increasing your credit utilization ratio — or the amount of credit you have compared to the amount of credit you’re using. Using less than 30 percent of your total credit line is the best way to keep your score high, and opening a new account could help switch the numbers in your favor.
That being said, opening a new account could be detrimental to your FICO score if you make a large purchase right away. If you can’t increase your credit limits any more than you have, for example, consider opening a new account. Don’t be tempted to spend irresponsibly, though — its main purpose is to fix your credit utilization ratio, not to shop and create a new balance.
The interest rate could be temporary
Finally, you’ll want to consider the interest rate of the new account. Credit cards often advertise a stunningly low interest rate, but it usually only lasts for the first year. That means you might only pay 11 percent interest on purchases for a while, but could seen be paying 20 percent.
Before you agree to sign up for a new credit card, find out what the interest rate is for the first year and what it will raise to later. Shop around for the rate the best suits you and your budget.